Macroprudential policy and the tail risk of credit growth

I show that macroprudential policy has significant heterogeneous and time-varying effects on the credit growth distribution. These effects are particularly evident in reducing rightward skewness during expansionary periods of the financial cycle, thereby mitigating the upside risk of credit growth. Conversely, during financial crises, the relaxation of macroprudential policy positively impacts the left tail, reducing the risk of severe credit contractions. These findings align with previously documented benefits of macroprudential policy on the downside risk of GDP growth, providing evidence of the mechanism through which these policies act via credit growth. I also identify interactions between macroprudential policy, bank profitability and monetary policy. High bank profitability limits the effectiveness of macroprudential policy in curbing excessive credit growth, while macroprudential policy complements monetary policy by targeting tail risks, which affects the credit growth distribution more uniformly. I also find significant disparities based on the type of tool implemented and the sector targeted. Borrower-based measures are particularly effective in moderating household credit during expansions, whereas capital releases are especially supportive of credit to non-financial corporations during crises.